Socialism with cheap oil

Hugo Chávez embarks on a race against the impending impact of world recession

DURING a turbulent decade in power, Venezuela's president, Hugo Chávez, has been greatly helped by his own remarkable ability to inspire loyalty among ordinary Venezuelans on the one hand, and the sharp rise in the price of oil, the country's only significant export, on the other. But the world price of oil has fallen from a peak of $147 last July to $40. And popular discontent with Mr Chávez's corrupt and autocratic regime is mounting. So 2009 looks like being a difficult year for Mr Chávez and his “Bolivarian revolution”.

Re-elected as president in December 2006, Mr Chávez is not due to leave office until January 2013. But he is rushing to hold a referendum on a constitutional amendment that would remove the limit on further presidential terms. This measure has already been defeated once, albeit narrowly, in a referendum on a wider bundle of constitutional proposals in December 2007. As five years of oil-induced economic boom turn to imminent bust, Mr Chávez needs to move fast, lest the mood of the electorate should turn decisively against him.

The president's overwhelming parliamentary majority, together with his grip on the supreme court and the electoral authority, mean that the referendum may be held as early as mid-February. But he faces an uphill fight to get the amendment approved. He is still popular, with an approval rating of between 55% and 60% in most polls. His candidates won around 53% of the vote in state and municipal elections in November. But those same polls show that public opinion is strongly against removing presidential term limits.

A gathering economic storm means that the president cannot count on remaining popular. Mr Chávez insists that his “21st-century socialism” means Venezuela will avoid the recession. “Not the slightest gust of wind has touched us, while Europe [and America] are being battered by storms,” he said this week. But independent analysts are much less sanguine.

Despite his talk of “endogenous development” and economic diversification, Venezuela is more dependent on oil now than it was when Mr Chávez took power. Oil brought in 92% of export revenues in the first nine months of 2008, compared with 64% in 1998. The 2009 budget, which foresees public spending of $78 billion, assumes an average oil price of $60 a barrel (and economic growth of 6%). Venezuelan crude, much of which is heavy (meaning viscous), currently sells for around half that figure. The budget also assumes that Venezuela produces 3.4m barrels of oil per day. Independent sources, including OPEC, say output is about 1m barrels less.

Although the budget involves a nominal increase in spending of 23%, in real terms it involves a contraction. In the past few years, the government has spent heavily off-budget, on infrastructure and other projects. It will find that harder this year. When pressed to explain how it intends to pay this year's bills if the oil price remains low, officials say that they can draw on up to $100 billion in international reserves and money in various discretionary funds. The Central Bank's reserves are around $38 billion; the government has siphoned tens of billions more into an unaudited National Development Fund, and other off-budget places. But quite how much these funds contain is unclear.

Many private-sector economists believe that, if the oil price levels out at somewhere close to the budgeted figure, the government will be able to muddle through until 2010. But the economy is already cooling rapidly. Even optimists predict growth of no more than 3%, higher inflation and a fiscal deficit of at least 3%. Some expect zero growth. Partly because Mr Chávez has harassed the private sector, imports have increased much faster than local production (see chart). That trend now looks unsustainable.

Not for the first time in Venezuela, a sudden fall in the oil price will reveal the economy's structural flaws. Despite the government's insistence that it will maintain social spending, the poor will once again bear the brunt of the downturn. According to José Manuel González, president of the main employers' organisation, Fedecamaras, 75% of food is now imported. Unemployment, which stands at 6% by the official count, is being held down by government grants to educational “missions” and unprofitable co-operatives. Under Mr Chávez, too, the number of public employees has roughly doubled, to well over 2m, without taking into account over 1m public-sector pensioners. Just paying the wage bill, let alone subsidies and food imports, may soon become problematic.

Then there are compensation payments, totalling several billion dollars, that Mr Chávez is committed to paying out after a nationalisation spree he embarked on in 2007. This has included state takeovers of the cement industry, a large Spanish-owned bank, a big steelworks and parts of the heavy-oil processing facilities formerly owned by Exxon Mobil and ConocoPhillips. The next target is a gold mine.

Keen to avoid measures that look like “neoliberal” austerity, the government is doing its best to disguise and delay the necessary fiscal and monetary steps. But it has doubled an airport departure tax and the fees charged by public notaries. More tax rises (including in VAT, now at only 9%) seem bound to follow. Foreign currency allowances for travellers are being cut, while more importers are finding that they have to resort to the parallel exchange market to obtain their dollars.

Devaluation would help pay the bills, at the cost of a further spike in inflation, but the government is likely to stick to the longstanding (and overvalued) official rate of 2.15 bolívares to the dollar as long as possible. The state oil company is reported to be surreptitiously selling some of its dollars on the illegal parallel market (at a rate of around five bolívares).

Since much oil is presold, the recent plunge in its price will start to be felt in earnest only this month. That is when Venezuela will start to feel a cold draught from the slowdown in the world economy. But with so much hanging on the referendum result, the president will do his utmost to cushion the immediate impact. That will almost certainly include raiding the reserves to help balance the books.

Exactly 20 years ago, faced with a similar drop in oil prices, Venezuela's then-president, Jaime Lusinchi, postponed austerity measures in a successful bid to get his party's candidate, Carlos Andrés Pérez, elected president. Mr Pérez found himself obliged to impose drastic spending and subsidy cuts, which led to riots and looting in which hundreds died. Ironically, Mr Chávez traces the start of his “revolution” to that moment.

Unlike 1989, the government this time has a healthy level of reserves. Its off-budget funds may give it scope to run a counter-cyclical fiscal policy for a while. The government has set up a special public-relations committee, in a bid to avoid the presentational fiasco that contributed to Mr Pérez's undoing. All this may or may not be enough for Mr Chávez to win the referendum, and perhaps for the government to get through 2009 without a radical change of course. But if he genuinely believes, as he declared this week, that his “socialist project will emerge strengthened” from the world recession, he will soon enough be disabused.